Bypassing the Financial Growth Cycle: Evidence from Capital Pool Companies

Posted: 10 Nov 2009

See all articles by Cécile Carpentier

Cécile Carpentier

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies

Jean-Marc Suret

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies

Multiple version iconThere are 2 versions of this paper

Date Written: 2006

Abstract

The study examines the Canadian Capital Pool Companyprogram and its ability to enable SMEs direct access to the stock market, thuscircumventing the conventional growth circle. The Capital Pool Company Programwas launched in Canada in the late 1980s, allowing for the listing of smallfirms, with assets lower than $1 million. The Capital Pool Company program wasdeveloped based on three assumptions: (1) many firms likely to be profitablerequire external, non-conventionalfinancing; (2) small firms can grow andsucceed without the range of services offered by conventional fundingproviders; and (3) individual investors can evaluate correctly the price of thestocks issued by small young firms, and determine whether a firm is under- orover-valued. These postulates are not specific to the Capital Pool Company Program, andtheir analysis hereinis meant to assess their applicability and groundingin reality. These have implications for the appropriateness of public policythat eases access to equity through the stock market, and the role that theevaluation process plays that is incorporated in obtaining private equity, orconventional financing. An in-depth analysis of the quality and theperformance of 450 firms from the Capital Pool Company program does not confirmany of the three postulates. The findings show that the Capital Pool Company program allows non-viablecompanies to enter the stock market. Most of the companies resulting from theprogram have a poor operating performance in the years following their listing.The findings also show that the abnormal stock returns are negative.Recommendations are made for public policy development, especially towardfacilitating the entry of emerging companies on the stock market.(CBS)

Keywords: Equity financing, Business assistance programs, Information asymmetry, Public equity, Investors, Capital, Stock markets, Financial growth, Firm financing, Firm performance

Suggested Citation

Carpentier, Cécile and Suret, Jean-Marc, Bypassing the Financial Growth Cycle: Evidence from Capital Pool Companies (2006). Journal of Business Venturing, Vol. 21, Issue 1, p. 45-73 2006. Available at SSRN: https://ssrn.com/abstract=1503245

Cécile Carpentier (Contact Author)

Laval University ( email )

Pavilion Palasis Prince
Quebec, Quebec G1V 0A6
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal, Quebec H3C 3J7
Canada

University of Lille II - European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

Jean-Marc Suret

Laval University ( email )

Accounting School
Quebec, P.Q. G1K 7P4
Canada
418-656-7134 (Phone)
418-656-7746 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

1130 rue Sherbrooke Ouest
Bureau 1400
Montreal, Quebec H3A 2M8
Canada

European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

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